Gold edges up after two-day drop on weaker dollar, steadier oil

By Clara Denina

LONDON (Reuters) - Gold rose on Thursday, snapping two days of losses, as the dollar softened ahead of the Christmas holiday break, and a recovery in oil prices helped sentiment.

Spot gold rose 0.2 percent to $1,072.70 an ounce by 1251 GMT, after losing 0.7 percent in the last two sessions.

Many financial centres will shut early on Thursday and stay closed on Friday for the Christmas holiday. Some will remain shut on Monday.

Bullion prices have shed 9 percent so far this year, a third year of losses, mostly due to expectations the U.S. Federal Reserve would raise interest rates, which it did this month.

"Leading into this rate hike, there was a lot of negative sentiment but now that's rebalancing, which is price supportive in the short term," Julius Baer analyst Warren Kreyzig said.

"But when people start to focus on the fundamentals of low inflation, economic growth in the U.S., the impact on gold will be bearish again," Kreyzig added.

With the first U.S. rate increase in nearly a decade out of the way, the focus is now on the pace of future hikes, analysts said.

Higher rates dent demand for non-interest paying gold, for which the outlook remains largely on the downside, with many predicting a drop below $1,000 by the end of next year.

The dollar slipped 0.3 percent against a basket of leading currencies, down for a fourth session out of five after recent mixed U.S. data.

New orders for U.S. manufactured capital goods fell in November and the prior month's increase was revised sharply lower, while other data showed consumer sentiment at a five-month high in December and personal income rising for an eighth straight month in November.

A softer dollar makes gold cheaper for foreign investors.

In other markets, crude prices steadied above $37 a barrel, a fourth day of gains after hitting a lowest since early 2009 on Monday.

Gold is positively correlated to oil as the metal is seen as a hedge against oil-led inflation.

"If oil continues to rally we think this would eventually feed into real gains for gold prices," HSBC said in a note.

Silver rose 0.2 percent to $14.32 an ounce, while palladium gained 1.2 percent to $555.47 and platinum was up 0.4 percent at $871.60.

(Additional reporting by A. Ananthalakshmi in Singapore; Editing by William Hardy and David Evans)